Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/25591
Authors: 
Qiu, Jianying
Year of Publication: 
2007
Series/Report no.: 
Jena economic research papers 2007,017
Abstract: 
Parimutuel betting markets are simplified financial markets, and can thus provide a clearer view of pricing issues which are more complicated elsewhere. Though empirical studies generally conclude that the parimutuel betting markets are surprisingly efficient, it is also found that for horses with lowest odds (favorites), market estimates of winning probabilities are smaller than objective winning probabilities; for horses with highest odds (longshot), the opposite is observed. This phenomenon, called the favorite longshot bias, has many explanations such as risk seeking preference, transaction costs, and non-linear transformation of probabilities into decision weights, etc. This paper combines loss aversion with mental accounting, and provides a new explanation for the favorite longshot bias. We show that the bias exists in the absence of all above mentioned reasons, and the degree of the bias differs depending on the type of the mental accounting process that bettors apply.
Subjects: 
loss aversion
mental accounting
parimutuel betting
the favorite longshot bias
JEL: 
C72
D40
D81
G10
Document Type: 
Working Paper

Files in This Item:
File
Size
534.69 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.